Legal

Bill would make some forgiven student loans tax-free

By Bankrate

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

taxes-blog-forgiven-debt-tax-free

Owing a debt you can’t repay is bad. Owing federal taxes on that debt amount even after you no longer have to pay it back is even worse.

Federal tax law, however, requires in most cases that when a loan is forgiven, the amount that is written off by the lender is taxable income to the previous debtor.

Sen. Debbie Stabenow, D-Michigan, thinks that’s wrong when the debt was incurred under fraudulent circumstances, specifically to pay for college. Stabenow has introduced the Student Tax Relief Act, a bill that would protect defrauded borrowers from being taxed on their forgiven student loans.

Corinthian College cause

Her bill, S. 3008, was drafted in the wake of the federal investigation into Corinthian Colleges, Inc. and its associated schools.

The Department of Education found that the now-defunct for-profit chain run by Corinthian defrauded students at more than 100 schools in more than 20 states across the country.

Following the fraud finding, the Education Department told students who borrowed money from Uncle Sam to attend Corinthian classes that they would not have to repay those loans. Affected students can apply for loan forgiveness through the department’s Federal Student Aid division.

That’s a welcome step for the bilked students. The Education Department says that as of March 1 it had processed almost 9,000 claims from former Corinthian students nationwide, totaling more than $132 million.

Canceled, but taxable, debt

The forgiven debt provisions of the Internal Revenue Code generally require that such canceled debt is taxable. For example, folks who are able to negotiate down or away debt owed on credit cards face the same tax due on what is called phantom income.

A notable exception is in the case of some residential foreclosures or mortgage renegotiations, where a special, temporary law allows certain home-related canceled debt amounts to be tax free.

The Corinthian students also were provided special tax relief on the amounts cleared by the Department of Education.

Stabenow’s bill, which has 7 Democratic cosponsors in the Senate, would give the same tax relief to students in similar educational fraud cases.

“When students take out loans to attend college, they should get a fair deal and a fair shot,” said Stabenow in announcing the introduction of the Student Tax Relief Act. “No student should be the victim of false advertising from a college that promises skills or job placement. And the last thing they deserve is to be hit with an enormous tax burden on their forgiven loans.”

Time running out

Stabenow’s bill might be able to garner some additional support. The issue of burdensome student debt in general already is under a spotlight, thanks in large part to Vermont Sen. Bernie Sanders’ campaign to be the Democratic nominee for president.

But time is not on the side of Stabenow’s effort. The tax-writing Senate Finance Committee, where the bill is pending, has not scheduled any hearing on S. 3008.

And with the upcoming November elections, the House and Senate aren’t going to be in session much. The chambers’ schedules are reduced so that Representatives and Senators can return home to make their reelection cases.

If, however, enough constituents let lawmakers know of their student debt concerns, both on a wider scale and in connection with cases like Corinthian, there might be some action on Stabenow’s bill this year. That would be a welcome development for former students facing an unexpected tax bill next filing season on their forgiven school loans.

Have you ever faced a tax bill on forgiven debt? Do you agree with Stabenow’s proposal? Do you think the tax code is right, or should all forgiven debt be tax-free?

Rich taxpayers tend to be rewarded

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

taxes-blog-rich-taxpayers-rewarded

Here’s a news flash that’s not news: The richest Americans have shaped the U.S. tax code so that it saves them potentially billions.

The reason the rich essentially have what the New York Times calls their own private tax system is simple. They can afford to hire the best and brightest tax attorneys and accountants.

Those tax experts, according to the newspaper’s special report, employ a “dizzying array of tax maneuvers” to help the very wealthy shield their fortunes. “Operating largely out of public view – in tax court, through arcane legislative provisions and in private negotiations with the Internal Revenue Service – the wealthy have used their influence to steadily whittle away at the government’s ability to tax them,” write reporters Patricia Cohen and Noam Scheiber.

And those same wealthy tax break beneficiaries are, according to the New York Times’ story, “providing much of the early cash for the 2016 presidential campaign.”

So how are those political contributions working out?

GOP tax plans favor the wealthy

Donald Trump, the leader in many polls for the Republican nomination, talks a good tax game. He is, after all, a salesman. And he’s slammed the millions that hedge fund managers make by, in his words, pushing paper.

But he also wants to end the estate tax, which applies only to a statistically tiny group of rich U.S. taxpayers.

An analysis of Trump’s tax plan by the Washington, D.C.-based Tax Policy Center, or TPC, shows that its greatest benefits will go to The Donald’s peers, the wealthiest Americans. TPC’s analysts say Trump’s proposal would grant the top 0.1% a tax cut of almost 19%, while providing the lowest income bracket a tax break of only about 1%.

The same can be said about another Republican White House hopeful, Jeb Bush, who also favors repeal of the estate tax. The TPC says that under the former Florida governor’s tax plan, the top 0.1% of U.S. taxpayers would get about a 12% tax break, while the lowest income bracket would see a 1.4% tax break.

Sen. Marco Rubio, R-Florida, who’s moving up in the polls, wants to condense the current 7 tax rates to just 3. Tax Foundation analysts say that would provide the largest benefits to the lowest-income Americans, who would see their after-tax incomes rise by more than 44%. But the next largest group of beneficiaries under Rubio is the country’s highest-income earners, who would see their after-tax incomes grow by 11.5%.

Democrats less helpful to wealthy’s tax concerns

The rich don’t fare as well under proposals by the 2016 Democratic presidential hopefuls.

Front-runner Hillary Clinton is calling for, among other things, enactment of the Buffett Rule. This proposal, named after the financier Warren Buffett, would require that the rich pay at least a minimum ordinary income tax rate instead of primarily lower capital gains tax rates.

Bernie Sanders, Clinton’s nearest competitor, would like to see a new top tax rate of at least 50%. Income falling into the current top income bracket is taxed at 39.6%.

Flat, but not that fair tax

Then there are the flat taxers. Proposals to do away with the current progressive tax system and enact 1 tax rate to be paid by all are touted by several Republican candidates: retired neurosurgeon Ben Carson (a 15% rate), Texas Sen. Ted Cruz (10%), Kentucky Sen. Rand Paul (14.5%) and former Pennsylvania Sen. Rick Santorum (20%).

While one rate for all sounds like a fair plan, our current progressive tax rates are more beneficial for lower-income taxpayers.

And, as the New York Times reports, the wealthy have become quite adept at dealing with our 7 tax brackets and assorted other tax laws so that they don’t suffer as much at the hands of the IRS.

So basically, the bottom line is that the rich rule when it comes to taxes. And not to be a nay-saying cynic, but changing that is going to take much more than one election cycle.

Still, we have to start somewhere and voting is a great beginning. We average Joe and Jane taxpayers who are very far from rich must make all public office candidates address our tax issues and hold them accountable for our concerns.

We can’t afford to be swayed by swagger and snippets of tax proposals that, on the surface, sound appealing, but that in reality don’t do us much tax good at all.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Tax Scam Alert

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!  

As incidents of an aggressive telephone scam continue across the country, the IRS warns taxpayers not to be fooled by imposters posing as tax agency representatives. You can read the article from the IRS here:

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R-2014-105, Oct. 31, 2014

WASHINGTON — As incidents of an aggressive telephone scam continue across the country, the Internal Revenue Service unveiled a new YouTube video with a renewed warning to taxpayers not to be fooled by imposters posing as tax agency representatives.

The new Tax Scams video describes some basic tips to help protect taxpayers from tax scams.

These callers may demand money or may say you have a refund due and try to trick you into sharing private information. These con artists can sound convincing when they call. They may know a lot about you, and they usually alter the caller ID to make it look like the IRS is calling. They use fake names and bogus IRS identification badge numbers. If you don’t answer, they often leave an “urgent” callback request.

“In recent weeks, we continue to see these telephone scams in every part of the country,” IRS Commissioner John Koskinen said. “We have formal processes in place for people with tax issues. The IRS respects taxpayer rights, and these angry, shake-down calls are clear warning signs of fraud. This is not how we do business. We urge people to be careful when they get these threatening phone calls.”

The IRS reminds people that they can know pretty easily when a supposed IRS caller is a fake. Here are five things the scammers often do but the IRS will not do. Any one of these five things is a tell-tale sign of a scam. The IRS will never:

    1. Call to demand immediate payment, nor will the agency call about taxes owed without first having mailed you a bill.
    2. Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
    3. Require you to use a specific payment method for your taxes, such as a prepaid debit card.
    4. Ask for credit or debit card numbers over the phone.
    5. Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.

If you get a phone call from someone claiming to be from the IRS and asking for money, here’s what you should do:

  • If you know you owe taxes or think you might owe, call the IRS at 1.800.829.1040. The IRS workers can help you with a payment issue.
  • If you know you don’t owe taxes or have no reason to believe that you do, report the incident to the Treasury Inspector General for Tax Administration (TIGTA) at 1.800.366.4484 or atwww.tigta.gov.
  • If you’ve been targeted by this scam, also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.

Remember, too, the IRS does not use email, text messages or any social media to discuss your personal tax issue. For more information on reporting tax scams, go to www.irs.gov and type “scam” in the search box.

Additional information about tax scams is available on IRS social media sites, including YouTubehttp://www.youtube.com/user/irsvideos and Tumblr http://internalrevenueservice.tumblr.com, where people can search “scam” to find all the scam-related posts.

Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

 

 

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.